UDAN : Concerns Raised by the Indian Aviation Industry

The final guidelines under the Regional Connectivity Scheme (RCS) as envisaged in the NCAP, which have been named as UDAN (Udey Desh ka Aam Nagrik) are set to be announced today by the Civil Aviation Minister Ashok Gajapathi Raju. The government believes that its ambitious UDAN will jump-start regional aviation in the country. This seems to be in sync with the IATA’s recent forecast: “In 10 years, the Indian aviation market will be the third largest in the world, overtaking the UK.”

“We are very hopeful of a positive response from the industry but our thinking is that with the scheme, we will in fact be jump-starting regional aviation,” Minister of State for Civil Aviation Jayant Sinha has said. 

He expressed his hope that the scheme would be “quite attractive” for consumers, carriers, small and regional airlines, lessors and other players in the ecosystem.

He said that the purpose of formulation of such a scheme is that regional carriers get the support they need both in terms of reducing their cost as well as in terms of viability gap funding so that they can serve tier-II and tier III cities.

The government had on July 1, 2016 unveiled the draft scheme which fixed all-inclusive fares at Rs 2,500 for one-hour flights in its attempt to make flying affordable for the common man. The complex scheme seeks to connect currently unlinked towns as well as extending viability gap funding (VGF) through a regional connectivity fund. There are 394 unserved and 16 under-served airports.

On one hand the government exudes optimism, while on the other hand, aviation experts have said they are not sure about how much of this projected growth will materialise considering several constraints currently plaguing the Indian aviation industry. They reckon legislative constraint is one major hurdle as far as Regional Air Connectivity is concerned. The established airlines grouping – the Federation of Indian Airlines (FIA) – who controls over 80% of India’s aviation, has asserted that the government does not have any authority or mandate to impose levy in nature of tax on scheduled flights. It has threatened to initiate legal action against the imposition of levy.

On its part, the government has defended the imposition of levy on scheduled flights from trunk routes to fund the scheme. The Minister of State for Civil Aviation Jayant Sinha has said that the government had a “very extensive” stakeholder’s consultation process prior to the formalisation of the RCS.

“We have already clarified from the ministry. Based on our own discussions with the Law Ministry, we think we can look forward to this kind of arrangement (imposition of levy) within the current legislation,” he said.

Apart from the upcoming legal battle, the country’s aviation industry has aired its various concerns about the regional connectivity scheme. A day ago, the Minister of state for Civil Aviation Jayant Sinha had hosted a round table in Delhi where the chief executives of airline companies, aircraft lessors and executives in the maintenance, repair and overhauling of aircraft businesses had been invited. Therein the executives voiced their fears. One serious concern is infra structure related – the non-availability of slots at major airports such as those at metros.

The majority of flights still operate from Delhi, Mumbai, Chennai, Bengaluru and Kolkata, airports. These metro airports today are running to capacity. Thus, they have very few slots available for each airline. Some of them like Mumbai have stopped allotting fresh slots altogether. The executives stressed that it was important that some slots be made available at the major airports. Slot constraints at the metro airports prevent the linking of smaller airports with the bigger ones. The hub and spoke model, thus, will not work. For effective execution  of the RCS, this is the basic requirement.

The aim of the NCAP has been – “Take flying to the masses.” The scheme entails capping of the fares at an affordable Rs 2,500 for flights of one-hour duration. (Although, one can travel by air for an hour in a scheduled LCC at less than Rs 1800 even today. Search a cheap air fare at this site now !) The government is aware that Rs 2500 does not fully cover the airplane’s operating costs. So, the government has proposed to indemnify the difference through subsidies which will be provided for a period of three years. The scheme is dependent upon VGF. So, the chief objective should be to rationalise the costs of aircraft operation. Unfortunately, that doesn’t seem to be happening because most of the overheads like landing costs, excise on fuel, user development fee, etc. are increasing. The proposed subsidy is very little for a small 10-20 seat air craft. The cost of seat per kilometer, their acquisition cost, is almost twice that of a regular 80-seater plane. Further, a potential investor will not like to run the business on “crutches of subsidies”.

Air India Soars on More Promotional Schemes

India’s aviation industry is currently witnessing a big fare war. When it comes to natural air fare war, it seems that the senior most Airline in the country, Air India, often has a leg up on new airlines. Air India does not want to lag behind. It intends to defeat all its rival airlines and attract passengers through lowest fares. The end user, the flier, has no complaints.  The flier does not see anything wrong with AI’s increased publicity campaigns.

So many plane players…. Air India is one of them.

“It’s tough to fight in terms of market share as the private airlines are adding capacity at a frantic pace. As a government airline, we don’t have the luxury to do so,” says a top official of the Air India. Aiming to attract more fliers and achieve higher seat occupancy in its flights on trunk routes, National carrier Air India has decided that it will be providing “unbeatable metros fare” to domestic passengers willing to return the same day from July 25, 2016.

Air India is now realising that it needs to market itself and grab visibility. It is pulling out all the stops in its high-decibel promotional offers and advertising campaigns. As part of the pricing strategy, Air India will drop fares on four key routes, Delhi-Mumbai, Delhi-Chennai, Delhi-Kolkata and Delhi-Bengaluru, for tickets booked four hours before departure. Air India has an average load factor of 74 per cent across its domestic network while the seat occupancy on these routes is around 80 per cent.

Speaking to media, S Venkat, Air India Finance Advisor, said, “We are going to introduce new scheme for our all passengers who want to return same day flights in metro cities. Fares will be minimum Rs 5,000 and maximum Rs 10,000.”

“This is very attractive fare for all passengers. I am sure this scheme will attract the flyers as the fare is affordable. Earlier, we had launched “equal to Rajdhani fare” scheme, which had received good response. Now, we are launching the special fare scheme,” he added.

Last month, Air India had floated a scheme to fly unconfirmed passengers of Rajdhani trains at fares matching with the AC first class ticket prices. A Mumbai-Delhi air ticket is now available upwards of Rs 3,700 for next day travel on all airlines, while a Rajdhani AC first-class ticket costs Rs 4,755.

These have resulted in improved sales and better engagement with the trade. Ticket sales are rising on travel portals. Air India is engaging with agents and is implementing more customer-friendly initiatives. AI has also agreed to agents’ requests for web parity in fares, offering the same levels on its website and other portals. Thus, bookings for AI this year on travel portals like NC Airways, have increased with especially strong growth in long-haul international flights.

In FY16, the airline cut its losses to Rs 2,636 crore from Rs 5,859 crore in 2014-15, mainly due to a Rs 2,754 crore saving in fuel. “Fuel, of course, helped but I believe the turnaround has been due to efficiency in the management. We are now running the house like a proper corporate,” says Ashwani Lohani, Air India’s CMD.” He is of the view : “A professional firm cannot function on crutches. We want to fly, fly and fly more.”

Air India’s decision to reduce fares is likely to leave its rivals uncomfortable as they have been accused of raising the fares by 2-3 times for last-minute bookings.

Curious Case of Placing 1850 New Airplanes

In 2015, one of the biggest plane makers in the world, Boeing, had predicted for India a demand for 1,740 new airplanes valued at USD 240 billion over the next 20 years.

In 2016, it is saying that the country will need 1,850 new airplanes worth USD 265 billion over the next 20 years.

This increasing demand will be driven by single-aisle planes such as the 737 Max and Next-Generation 737s from Boeing and A320 Neos from its arch rival Airbus.

Boeing Corporation and others appear bullish about the Indian aviation sector, the fastest-growing market in the world in terms of passenger traffic as per the latest IATA numbers. Dinesh Keskar, Senior Vice-President for Asia Pacific and India, Boeing Commercial Airplanes interacted with media while releasing Boeing’s ‘Current market outlook for India’ report. 

Keskar elaborated on India’s need of more airplanes:

Type of Planes

Seats

Aircraft Nos.

Value USD (billion)

Single-aisle

90-230

1560

180

Wide-body

200+

280

85

Regional Jets

10

90

1

This will make India contributing to over 4.6 per cent of the global demand for 39,620 airplanes by 2035, and 4.5 per cent of world demand in terms of value,” Keskar said.

Attributing the bullish outlook to the new civil aviation policy, favorable demographics and low fuel prices, Keskar said, “India continues to have a strong commercial aerospace market and the highest domestic traffic growth in the world.”

Keskar commented on the government’s regional connectivity push, saying even as it has capped prices, the promise of refunding 80 per cent of losses, if any, will help the airlines drive the business. The government revamped rules governing the aviation industry, liberalising norms for domestic carriers to fly overseas and spreading the country’s air travel boom to smaller cities. “With the new aviation policies in place, we even see greater opportunities, and remain confident in the market and airlines sector in India,” Keskar said. Boeing

The potential for further growth is encouraging operators to scale up their fleets. At least 709 planes are on order for the next 5 years. Domestic carriers are shopping for airplanes one after another in the hope that demand will stay strong and India will eventually become the third-largest civil aviation market in the world after China and the US by 2026.

  • Jet Airways ordered 75 Boeing 737 Max in November 2015.
  • India’s largest player IndiGo, has ordered 430 Airbus narrow-body jets on top of the 108 it already flies. It is the largest order in aviation history from Airbus.
  • GoAir ordered 72 new A320neo planes from Airbus. It is planning an IPO while simultaneously it may begin International services.IndiGo adds more aircraft
  • SpiceJet intends to increase its fleet size to 150.
  • New entrants Air Asia India and full-service airline Vistara, a joint venture between the Tatas and Singapore Airlines, are accelerating their fleet expansion plans.
  • Vistara has said it will have a fleet of 13 aircraft and fly up to 20 destinations by the end of 2016. The carrier has now 11 planes.
  • Vistara is also considering branching into the regional commuter carrier business using 70-seater aircraft. A subsidiary tentatively named Vistara Express.

Big challenge : To find landing and parking spaces for new planes.

Vistara Chief Strategy and Commercial Officer, Sanjiv Kapoor said recently in a Twitter post, “Yet hundreds of A320s on order. Where will they all fly, am really curious!”

Even as Boeing predicts that India will have 1850 aircraft over the next two decades, several Indian carriers struggle today to operate their aircraft. Reason : Inadequate airport infrastructure. The airlines are just able to manage 2,000 flights a day, and only a few of them could touch the 90 percent on-time performance mark. As air travel heats up in India, the world’s fastest-growing major aviation market,  aviation infrastructure has miserably failed to keep pace with air traffic growth which has been phenomenal in recent past .

The average time an aircraft spends circling before it can land in Mumbai during peak hours is about 45 minutes to an hour, versus 25 minutes for Singapore and zero for Qatar, according to Dubai-based Martin Consulting LLC.

India plans to invest $5 billion to improve airport infrastructure, which is “inadequate” compared with China’s proposal for $130 billion in 15 years, a June research paper by KPMG and the Associated Chambers of Commerce of India said. A proposal for a new airport in the outskirts of Mumbai has languished on the drawing board since 1997. 

As much as $40 billion in investment is needed in the next 15 years to improve India’s airport infrastructure, according to estimates by Sydney-based CAPA Centre for Aviation.

“Infrastructure has to catch up as dynamics of aviation have changed,” said Mark D. Martin, founder Martin Consulting. “Countries must make sure that airports are built not just for bigger jets, but also for smaller, 5-10 seater planes to connect its people.”

The problem is not just limited to India. There has often been a gap between Mumbai Airportintention and infrastructure delivery for Asian airport, according to a 2015 research paper by OAG Aviation Worldwide.

It isn’t the case that India hasn’t done much in the past 10 years to develop airport infrastructure. It spent $2.7 billion to upgrade the airport in New Delhi and added a new terminal in 2010, while it spent another $885 million to modernize the Mumbai airport in 2014. 

Still there have been other airports which were not so lucky. There are 394 other unserved and 16 under-served airports in the country. Out of the nation’s 450 airstrips and airports, only 75 handle commercial airlines, with the rest remaining idle or rarely used because of weak demand, according to the government. “No aircraft movement takes place at 32 airports out of 125 airports, including civil enclaves belonging to Airports Authority of India (AAI),”Minister of State for Civil Aviation Jayant Sinha has said in a written reply to the Parliament.

Prime Minister Narendra Modi is trying to revive many of such unserved and under-served airports and airstrips to enhance regional connectivity. This has been a key highlight of the New Civil Aviation Policy. Weak demand have made many of these airports unviable even for commercial single-aisle jets. Moreover, in an effort to attract capital, Prime Minister Narendra Modi in June 2016 liberalised norms for foreigners, who can now fully own existing airports without government approvals.

jayant-sinha“In order to implement the scheme, a proposal has been submitted to the Ministry of Finance for making a budgetary provision of Rs 46,500 million to revive a total of 50 such airports/airstrips,” Sinha said in a written reply to the Rajya Sabha. “The scheme is to be implemented over a period of three years.”

Development and upgradation of airports is a continuous process and is undertaken by AAI depending on traffic demand, commercial viability and socio-economic considerations, among other factors.432526-sanjiv-kapoor-zeenews

“We need to move fast,” Sanjiv Kapoor said in an interview. “That’s a huge issue. You cannot have a commercial capital and a political capital that do not have slots available for growth,” he said, referring to Mumbai and New Delhi.

India finds itself hard-pressed to find parking slots for new airplanes. The lack of infrastructural facilities may even force carriers to defer deliveries. This will eventually immensely hurt plane makers like Boeing and Airbus Group SE.